Countries adopting their own CBDCs in wake of crypto’s popularity
With the notable exception of El Salvador, which adopted Bitcoin as legal tender in 2021, most countries have eyed cryptocurrency with suspicion. That seems only natural given that they’re issuing their own fiat currency and aren’t much interested in having competition, and crypto’s volatility is not well-suited to the role of a national currency. Still, there are enough things they like about the general concept that around 100 countries are exploring the possibility of issuing their own central bank digital currencies (CBDCs), and several have already launched them.
Among the most common benefits of CBDCs countries cite is inclusion. The Bahamas, which in October 2020 became the first country to launch its own digital currency, has about 30 inhabited islands. It’s not profitable for banks to have branches and infrastructure on all of them, and as a result approximately 20% of the population doesn’t have a bank account. The Sand Dollar aims to give those people better access to quick and easy financial services.
Not far away, the Eastern Caribbean Union introduced its own digital currency, DCash. Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines use it, with Anguilla opting out. DCash users, whether they have bank accounts or not, can make payments via smartphone app. The project aims to halve the amount of cash East Caribbean Dollars in circulation by 2025.
Jamaica is introducing a CBDC this year after a successful pilot in 2021. “This will serve as a foundation for Jamaica’s digital payments architecture and will facilitate greater financial inclusion, increase transaction velocity while reducing the cost of banking for the Jamaican people,” Prime Minister Andrew Holness tweeted.
Nigeria has launched a digital currency, the eNaira, that has drawn criticism and low usage rates because a small percentage of the country’s population owns a smartphone.
Several larger economies are in the process of testing CBDCs, including China, South Korea, and Sweden. China piloted digital yuan payments during the Beijing Olympics, processing a few million yuan (1 yuan is about 15 U.S. cents) in payments daily. India and the European Union are developing digital currencies.
CBDCs vs. Crypto
The biggest difference between government-issued digital currency and cryptocurrency is centralization. CBDCs are pegged to the value of the country’s currency, and a central bank controls the supply of that currency. Meanwhile, decentralization is crypto’s raison d’être. Both are minted on the blockchain and can cut out banks from the transaction. Payments are final, and they can eliminate foreign exchange and transaction fees, though CBDCs are limited to the areas where the corresponding physical currency is accepted.
Whereas crypto values rise and fall constantly, often with huge fluctuations in value over a short period, CBDCs are very concerned with stability and have an intrinsic value. Being centralized, transactions in CBDCs are completely traceable, making money laundering a much more difficult proposition than with crypto.
“Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money,” Christine Lagarde, president of the European Central Bank said when announcing the prospect of a digital euro.
Crypto enthusiasts counter that the free market is a better judge of value and that freedom from government manipulation or interference is precisely the appeal of a decentralized currency.
The interest in CBDCs from many countries around the globe has inevitably raised the question of whether the U.S. will adopt a digital currency. The Federal Reserve Bank of Boston and MIT are working on a blueprint for one, calling it “Project Hamilton.” A major challenge is that a digital dollar processor would need to perform “tens of thousands of transactions per second in real-time and scale to account for the potential growth in payment volumes,” Project Hamilton says. A February test run hit 1.7 million transactions per second, they said, far faster than any crypto network.
Private banks, of course, don’t want to be cut out of transactions, but the Federal Reserve doesn’t seem interested in doing so.
“Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. Potential intermediaries could include commercial banks and regulated nonbank financial service providers, and would operate in an open market for CBDC services,” the Fed’s paper “Money and Payments: the U.S. Dollar in the Age of Digital Transformation” states, though the liability would ultimately be with the Fed.
Bank of America analysts and others think a digital dollar could help preserve the U.S. dollar’s status as the world’s reserve currency. Other proponents argue it would be a competitive disadvantage not to introduce a digital dollar.
“The importance of remaining a leader in the global digital economy and supporting new innovations like digital currencies is a significant domain of strategic competition with other countries, including China,” Pennsylvania Sen. Pat Toomey wrote.
Others don’t see the point. In a speech titled, “CBDC: A Solution in Search of a Problem?” Christopher Waller, a member of the Federal Reserve board of governors, said only 1% of U.S. households are unbanked but want to be.
The Fed is taking public comment on its paper through May 20. While it won’t happen anytime soon, a digital dollar seems, as Bank of America’s analysts put it, an “inevitable evolution of today’s electronic currencies.”